Gold will Emerge Winner in this Tug of War
By Christopher G Galakoutis
Jan 19 2009 10:02AM
www.murkymarkets.com
A Federal Reserve balance sheet that has grown from 900 billion to well
over 2 trillion since last fall may be on its way to 10 trillion according
to some observers. There is no denying it’s been pedal to the floor in
money-printing efforts to restore the credit markets back to health.
What also needs to be restored is profits for the banking industry. It is
that industry, after all, that the Fed really answers to. It is also an
industry that knows how to profit from inflation. Throughout history
bankers and the ruling classes have profited from inflation, as a transfer
of wealth occurs at the expense of the vast majority of the population.
Along those lines what we have witnessed since last fall has been a Fed
effort to create inflation and rescue the banking system. This following a
textbook case of the law of unintended consequences, where runaway
commodity and food prices -- a consequence of an irresponsible bubble
creating Fed -- earlier in 2008 and a financial sector ailing due to its
own greed, saw a miscalculating Fed bring a violent reversal of those
trades and a crash, when it decided to backstop certain financial
institutions and not others.
Since then, the Fed has been purchasing commercial paper, mortgage-backed
securities, and any and all other assets to keep the banking system from
collapsing into a deflationary spiral. Expansion of the Fed plan,
including purchasing consumer and small business loans, as circumstances
warrant with the help of the Treasury, is sure to follow.
Calls for the Fed to "proceed with caution" with its new policy are going
unheeded. The fear is that plans are not in place to immediately reverse
course at first sign of inflationary trouble. In a market where a
misguided fear of a deflationary winter has its grip on most, inflation is
a luxury item beyond reach for now.
The stock market crash and continued deleveraging brought the financial
system’s money flow, gripped by fear, to a standstill. The Fed’s
efforts at gorging the money supply with new liquidity is an attempt to
overcome that standstill -- an opposing force also referred to as the rate
of money velocity -- and create positive inflation.
With green lights flashing across the central banking landscape, eager
governments and millions of citizens in dire straits, it is hard to imagine
that unlimited money printing will give way to a finite opposing force.
The point the opposing force is finally overcome is obviously of real
concern due its inflationary ramifications, and was reflected in the strong
price of gold throughout this crisis. Gold’s strength looks to be
signaling a coming inflation and an inability of central banks to withdraw
said stimulus in time.
Weighed down by enormous debt levels, no domestic savings from which to
draw, angry foreign creditors and a collapsing tax base, the Fed has no
choice but to inflate in a big way; while it may be a race to inflate
worldwide, the US has more baggage than others. With all countries both
daring the inflation monster while trying to stay one step ahead of its
jaws, the one that is weighed down the most, much like the slowest antelope
in tiger country, will naturally be the first to be caught. The carnage
won’t be pretty, but gold will shine.
Christopher G. Galakoutis
CMI Ventures LLC
Westport, CT, USA
****
Christopher G Galakoutis is an independent investor and commentator, who in
2002 re-directed his attention to studying the macroeconomic issues that he
believed would impact the United States, and the world, for many years to
come. He works diligently to seek out investments for his own portfolio
that align with his views, and writes about them on his website. With a
background in international tax, he also works with clients holding foreign
investments expattaxpros.coma. ensuring their global income tax costs are
being minimized.
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of GoldIRAS.com. Past performance of any investment is no guarantee of future performance. All investments have risk.
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